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The Dow Dogs Review
To Foolish Four or Not To...

by Tom Gardner
(TomG@fool.com)

Alexandria, VA (July 28, 1998) -- Back on February 12th, the Cash-King Portfolio bought four big, bad behemoths that trade on the New York Stock Exchange. Together, they have in excess of $350 billion in annual sales and over 800,000 employees around the world. When they move, cities shake. They're giants.

They're our Foolish Four holdings.

Chevron, Kodak, Exxon, and GM.

We invested around $5,000 of our $20,000, or 25 percent, into the Foolish Four, and they've earned us about $600 since then. That makes for a 12 percent return. During that period, get this, the S&P 500 has also grown exactly 12 percent while the Dow Industrials are up about 8 percent.

So the Foolish Four has matched the market since our February purchase. In that we'll pay no ongoing expense-ratio fee to a mutual fund to have them, we're happy enough about that performance. And since something on the order of 95 percent of all managed mutual funds have failed to keep pace with the S&P 500 over that time (while over-charging regular expenses for their -- ahem -- service to America), our Foolish Four investments assume an even brighter shine.

Like a polished knob or a 1999 penny.

Ah, but then compare the Foolish Four (Dogs of the Dow) to our Cash-King investments, and they lose some luster. Our CK holdings have made us over $3,000 off initial investments of about $15,000, for a return of 20 percent. That far outpaces S&P 500 gains of just 14.6 percent since February 3rd. It also storms past the 10.6 percent gains by the Dow Industrials. And finally, it far outruns more than 99 percent of all stock funds in this country, which are in the unusual habit of overcharging for their -- ahem -- services.

The exact numbers look like this:

    Since February 3rd 
 Cash-King Holdings   + 20.2 percent 
 S&P 500              + 14.6 percent 
 Dow Jones            + 8.0 percent 
 Mutual Funds         Grrrr 
 
    Since February 12th 
 Foolish Four          + 12.0 percent 
 S&P 500               + 12.0 percent 
 Dow Jones             + 10.6 percent 
 Mutual Funds          Arf 
 

And...

    Total Since February 3rd 
 Cash-King Portfolio   + 19.1 percent 
 S&P 500               + 14.6 percent 
 Dow Jones             + 10.6 percent 
 Mutual Funds          Woof 
 

These results might lead the casual observer to conclude that we should reduce our exposure to The Foolish Four, perhaps even that we never should've included the four stocks in our portfolio. That's been indirectly confirmed in articles by at least a few financial journalists, who lately have been proclaiming the death of the Dow Dogs, gone forever to rot in a cold oblivion.

Casual observers of their work and of this portfolio might agree.

Whenever casual observation and Manhattan-style financial journalism meet, it's time for The Fool to scratch the back of his head (about two inches above the right ear) and wonder aloud if maybe Conventional Wisdom hasn't reared its ugly face. Conventional Wisdom, too close a confidant of Manhattan's financial media, makes its living trying to convince you and me to accept it, to rely on it, to take comfort in it.

Let's not, without some scrutiny.

We're told that the Dogs of the Dow are dead, owing to the fact that they've lost to the market's average in this year or that. Why has it done poorly? They say the approach is now too popular, that the lackluster performance is evidence somehow of the financial illiteracy of the individual investor, and by gum, Joe, and George, shouldn't we all just rely on mutual-fund managers -- particularly those who yell commands into their telephones, like, "Colgate, get me 5,000 now! Get rid of all the McDonald's now, now, NOW!"?

But in all of these Wise scribblings, there's an unusual tendency to shorten time-frames. The Dow Dogs have now lagged over the past two years... over the past eighteen months... over the past year. But what sort of time period is that? We don't think a person can INVEST for the next year. That's speculation. And given that the average American is 34-years-old, with thirty years until retirement, we don't think that Manhattan's impatient view of the public markets serves the public good. Since we'll be investing here for a minimum of ten years, let's look at the Foolish Four by decade:

                 Dow           Foolish 
              Industrials        Four 
  
 1971-1980      + 121%         + 833% 
 1981-1990      + 283%         + 307% 
 1991-Present   + 331%         + 740% 
 

The last thirty years have presented a highlight film of slam dunks for Foolish Four investors. That doesn't mean that the model has beaten the market every year. Or every two years. Or even every three years. Or even more.

In fact, for the five years between 1986-1990, the Dow Industrials rose 87%, while the Foolish Four rose just 39%. Smush. The conventional short-term thinker (reading, say, Time Magazine for financial guidance) bailed out somewhere during that stretch, just relieved to make off with a profit. Look again at what he missed between 1991 and the present.

                    Dow           Foolish 
                 Industrials        Four 
  
 1991-Present     + 331%         + 740% 
 

Ouch.

Over the 27 1/2-year period dating back to 1971, the Foolish Four have now compounded annual growth of 22.9%. The Dow Jones Average has grown at a rate of 13.7%. Your Cash-King Portfolio managers hang their hats on these numbers. And we would similarly excuse short-term underperformance in equity mutual funds, if they'd stomped the market over the last 30 years. They haven't. Over 85% have been worse than average.

To be clear, though, while we're hanging our hat on the long-term performance of the Dogs, we aren't betting our whole future on it. We've only dedicated 25 percent of our account to Foolish Four investing. If, after ten years, the Dogs are dragging and there are logical, fundamental reasons to believe the model can't work going forward, we'll make the appropriate moves.

But, dear Fools, we won't be switching out because a financial journalist, who isn't held accountable, decides to attack the very short-term performance of the approach, without mentioning the history. We won't jump this way and then that, trying to time up one of the Seven Hot Funds for 1998 or taking suggestions from a financial industry that still rewards The Sale over The Service.

We'd be violating our fiduciary obligation to ourselves, if we did.

Instead, we'll just keep adding new savings money to our account, holding brokerage commissions under $10 per trade (with no annual expense ratio, to boot), and waiting for the momentum of our businesses to drive the long-term performance of our stock slips.

We definitely believe that we'll stomp the market's average performance over the next ten years, at significantly less cost than Wall Street offers. Sound businesses, with tight financial management, and growing brands can turn a small base of savings into financial security for generations of Fools. If the people knew, they'd buy fewer Powerball tickets (if any); they'd refuse to revolve debt on their credit cards; they'd ignore the Don-King-style touting of Wall Street's excellence; they'd buy & hold common stock for a lifetime. That's why our mission is to let potential Fools everywhere know about Cash-King investing. We hope you'll help too.

Tomorrow, I'll be back with an announcement about our plans for the next company to join our portfolio. Fool on!

Tom Gardner

Cash-King Strategy Folder
Cash-King Companies Folder

Today's Features -- It's what's going on at the Fool today.


07/28/98 Close
Stock  Change    Bid 
 ---------------- 
 AXP   -  9/16  112.25 
 CHV   +  5/16  85.81 
 CSCO  -1 1/2   96.00 
 KO    -1 7/16  83.50 
 GPS   -1 13/16 58.63 
 EK    -1       83.00 
 XON   -1 3/4   69.69 
 GM    +1 1/8   74.25 
 INTC  -  7/16  85.63 
 MSFT  -4 9/16  112.13 
 PFE   -2 9/16  111.69 
 TROW  -  13/16 36.31 
 

                  Day   Month    Year  History 
         C-K      -1.69%   2.66%  17.08%  17.08% 
         S&P:     -1.49%  -0.33%  12.87%  12.87% 
         NASDAQ:  -1.93%   0.06%  14.70%  14.70% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    112.13    43.26% 
     2/3/98   22 Pfizer        82.30    111.69    35.71% 
    2/27/98   27 Coca-Cola     69.11     83.50    20.83% 
     5/1/98   37 Gap Inc.      51.09     58.63    14.75% 
    6/23/98   23 Cisco Syst    86.35     96.00    11.18% 
    5/26/98   18 American E   104.07    112.25     7.86% 
     2/6/98   56 T. Rowe Pr    33.67     36.31     7.84% 
    2/13/98   22 Intel         84.67     85.63     1.12% 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     83.00    31.44% 
    3/12/98   20 Exxon         64.34     69.69     8.32% 
    3/12/98   15 Chevron       83.34     85.81     2.96% 
    3/12/98   17 General Mo    72.41     74.25     2.55% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2691.00   $812.55 
     2/3/98   22 Pfizer      1810.58   2457.13   $646.55 
    2/27/98   27 Coca-Cola   1865.89   2254.50   $388.61 
     5/1/98   37 Gap Inc.    1890.33   2169.13   $278.80 
    6/23/98   23 Cisco Syst  1985.95   2208.00   $222.05 
     2/6/98   56 T. Rowe Pr  1885.70   2033.50   $147.80 
    5/26/98   18 American E  1873.20   2020.50   $147.30 
    2/13/98   22 Intel       1862.83   1883.75    $20.92 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1660.00   $397.05 
    3/12/98   20 Exxon       1286.70   1393.75   $107.05 
    3/12/98   15 Chevron     1250.14   1287.19    $37.05 
    3/12/98   17 General Mo  1230.89   1262.25    $31.36 
  
                               CASH     $94.76 
                              TOTAL  $23415.45 
  
   
 *The year for the S&P and Nasdaq will be as of 02/03/98 
       

</THE CASH-KING PORTFOLIO>

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